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Solazyme: It Isn't Easy (Or Profitable) Being Green

by Sonya Colberg, Senior Investigative Reporter - 10/16/2014 9:51:06 AM

Trouble is blowing the lids off the petri dishes at Solazyme (SZYM), where the company has fruitlessly toiled for 11 years at turning sugar and algae into profit.

The San Francisco, Calif. oil-maker’s income statement and analyst estimates are already steeped in red.

It battles increasing net losses (note that, besides Sephora and other stores, SZYM also  unfortunately hitched its wagon to badly aging JC Penney (JCP)which traded ~$30 then, ~$7 now) as SZYM produces “green” wrinkle cream from algae.

SZYM also faces a massive string of red flags poised to smother its effort to create renewable oils and chemical for various markets from its sugar-fed algae.

*Plant shutdown likely dings oil production effort

SZYM first pushed out some commercial oil and drilling lubricant in May from a small area at Brazil’s Moema Plant that the townspeople call “the annex.” CEO Jonathan Wolfson understandably trumpeted the event resulting from a joint venture with Bunge, yet warned, “We have work ahead … establishing consistent production and reliable supply and from there we’ll turn to the ramp up process.”

But production and supply problems already appear to be damaging that ramp-up. Layoffs occurred when the annex lurched to a temporary standstill while a cranky boiler was repaired, according to our source located near the plant in the sugar cane heartland in Sao Palo, Brazil.

SZYM on Oct. 9 offered the sketchiest plant update, describing production of only “modest quantities” of commercial oils, warning:

“… downstream processes at Moema require further optimization and are not yet operating on a fully integrated basis. This is an area of significant focus and ongoing improvement."

So this suggests the plant is not scaling up according to expectations. 

Indeed, some analysts seem nervous about SZYM’s future, with PiperJaffray leading the pack with its issued “Underweight” rating, writing:

“… a lack of visibility into the scale-up at Moema in terms of committed contracts, timelines, and general plant operations underscore our Underweight thesis."

The analyst also complained about “very limited visibility/obfuscation into tangible productions metrics” and added:

“High variable costs and fixed cost absorption should start to ramp quickly at Moema, against limited volumes during the plant start-up. We believe that, ultimately, low sales volumes and high fixed costs will beget poorer than expected economics in an effort to secure volumes."

Credit Suisse wrote more gently last week about giving SZYM a “neutral” rating and estimating a $1.66 loss per share this year, while PiperJaffray raised the expected net loss to $1.93.

Other viewpoints on SZYM may be found here.

*Historic drought, fires build more uncertainty

The sugar cane crop that serves as SZYM’s feedstock has been hit by massive fires and the worst drought in 100 years.

Sugar industry group Unica reports the two factors have already substantially cut the cane plantings and harvest for the 2014-2015 season.

With Bunge and other sugar and ethanol companies already cutting costs against losses, an industry spokesman said next season’s crop will suffer significantly. Sugar production is expected to be slashed about 3 million metric tons.

Those hits can only be expected to hold SZYM’s foot off the accelerator at the plant at least until sometime after the sugar cane harvest next year.  

*Advanced biofuels business performs poorly

SZYM’s biofuels effort also stands ready to disappoint investors, judging by three companies that have turned and run away from this business. They are Kior ($20 in 2011, now ~7 cents, unable to commercialize biofuel, delisted), Gevo ($25 in 2011, now ~29 cents, tried biofuels but returned to ethanol) and a company TheStreetSweeper warned about, Amyris ($32 in2011, now ~$3, now focused on perfume oils).

The stock chart tells the story:

SZYM has managed investor sentiment so the stock hasn’t yet been smashed to pennies. But we expect the screws will be tightened now that the company is expected to produce.

*Goodbye president, hello trouble

These three sudden, quiet departures throw more red flags at SZYM’s future:

  1.  SZYM president and director, David Cole, jumps out with a golden parachute worth $844,000 to consult for SZYM for $20,000 per month.
  2. Engineering vice president, Mark Warner, hired to design SZYM plants worldwide and build out commercial scale success, left in September to join another company called Impossible Foods, according to LinkedIn. But SZYM didn’t even bother to tell investors.
  3. Long-time director/audit chairman, Ann Mather, resigns, effective “prior to the end of 2014.” She is a board member of Google and a company TheStreetSweeper recently warned investors about, Gluu Mobile.

Whether these execs and directors were shown the door or found it themselves because of Brazil plant problems or something more or less ominous, we are unsure.

But we are pretty sure it amounts to bad news.

*Fund, insiders selling like crazy

Braemar Energy Ventures was a big holder of SZYM in 2013, with an ownership of about 8.2 percent of the shares.

But now Braemar has apparently lost faith in the stock and has recently sold more than 2 million shares, whittling down its ownership to just 4.99 percent of the company.

That seems to be the unfortunate trend with insiders because they have done nothing for a long time but sell, sell, sell SZYM.

In the last two months alone, officers and directors have sold a jaw-dropping 500,000-plus shares. The chief executive Mr. Wolfson led the charge by selling almost 275,000 shares in that timeframe.

*SZYM loses multimillions, pays executives multimillions

Investors shouldn’t make the mistake of taking a quick glimpse at SZYM’s finances and thinking, “Well, at least they’ve got some cash.”

That $285 million in cash and short term investments is mostly due to a massive debt load, including recent additions from private and public offerings. Besides, the company is burning that up in about $20 million chunks each month.

The company has now accumulated $384 million in losses.

Despite that, SZYM last year handed five top executives compensation packages, including stock awards, totaling $10.5 million.

That’s right. It apparently pays in spades to run a money-losing company facing spectacular odds.

The chief executive Mr. Wolfson received almost $3.5 million. CFO Tyler Painter, COO Jean-Marc Rotsaert and technology officer Peter Licari got about $2 million, while general counsel Paul Quinlan received $1.2 million.

Conclusion

It all looks bad: the massive fires and drought adding to oil production problems at the Brazil plant into next year, other companies failing to profit in the biofuels niche, sudden departures of key insiders, massive insider selling, executives with absurdly cushy compensations, plus the company’s 10 out of 13 sales misses since the 2011 initial public offering, and the current lower petroleum prices dampening acceptance of alternative oils or fuels.  

Now we expect analyst downgrades and declining estimates for the rest of the year and 2015.

In our opinion, the enterprise value of SZYM is close to zero.

All considered, the only green left in this company will have to be scraped from the bottom of a petri dish.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in SZYM and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to  scolberg@thestreetsweeper.org.

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